UAE raises benchmark rate considering the changes in US Federal reserves

The US central bank raised its target range referring to the federal funds interest rate by a quarter point

The Central Bank of the UAE raised its benchmark interest rates by 25 basis points following the US Federal Reserve, which increased its rates for the third time in 2018, indicating the possibility of further gradual hikes this year and next.

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The UAE’s banking regulator pushed the interest rate higher by 25 bps on its certificate of deposits, that are used as a monetary policy instrument through which changes in interest rates are transmitted to the financial institutions, the central bank said on Wednesday.The rate rise is effective from Thursday, which is also when the repo rate on borrowing short-term liquidity from the central bank against certificates of deposits goes up by 25 bps.

Saudi Arabia’s central bank said it was raising its reverse repo rate by 25 bps to 2.25 per cent, and its repo rate by the same margin to 2.75 per cent. Bahrain’s central bank raised its interest rate on its one-week deposit facility to 2.5 per cent from 2.25 per cent. Kuwait said it is keeping its key discount rate unchanged at 3 per cent. Unlike other GCC states which peg their currency to the greenback, Kuwait links its dinar to a basket of currencies.

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The Fed on Wednesday increased its target range for the federal funds interest rate by a quarter point, to between 2 per cent and 2.25 per cent. The move reflects the continued strength of the economy as growth and job numbers remain strong and inflation remains near the Fed’s 2 per cent target rate. The unemployment rate in the US reached 3.9 per cent in August; an 18-year low, while annual inflation reached 2.7 per cent in the same month.

Being a net importer of most goods and services with the exception of hydrocarbons, the Gulf region, which is home to about a third of the world’s proven oil reserves, is not severely impacted by the trade war. However, the Fed rate hikes will be consequential for the region’s energy dependent economies.Crude prices, which fell below $30 a barrel in the first quarter of 2016, have risen significantly and breached $80 per barrel mark this month, reducing funding needs of GCC states.

However, governments will still need to tap debt markets in order to fuel their economies.But the rising cost of borrowing for the Gulf issuers is expected to dent investor appetite for GCC credit as liquidity tightens, said Mohammed Damak, senior director and global head of Islamic finance at S&P.Oil price stabilization has brought some fiscal stability in the region which has about $350bn worth of funding requirements at the government level between 2018 and 2021. These financing requirements could be met either by drawing down on assets or issuing debt at the sovereign level, Benjamin Young, associate director and sovereign and international public financing ratings at S&P said.The rising cost of borrowing and tightening liquidity will make it more challenging for some countries, who don’t have the fiscal buffers enjoyed by some of their regional peers, to bridge their budget gaps.

The effect of rising interest rates will also be felt by the corporate and financial institutions which have turned to capital markets in the past few years to raise funds. However, Abdulfattah Sharaf, the group general manager and chief executive of HSBC in the UAE expects debt issuance – sukuk, bonds and export credit agency-backed deals – at least in the UAE, to remain stable even with the Fed rate hikes.